UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-Q
(Mark one)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _______ to _______
Commission file number 333-29357
PACKAGED ICE, INC.
(Exact name of registrant as specified in its charter)
TEXAS 76-0316492
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
8572 KATY FREEWAY, SUITE 101
HOUSTON, TEXAS 77024
(Address of principal executive offices)
(713) 464-9384
(Issuer's telephone number, including area code)
Check whether the registrant (1) filed all reports required to be filed
by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for
such shorter period that the registrant was required to file such reports),
and (2) has been subject to such filing requirements for the past 90 days.
Yes [X] No [ ]
State the number of shares outstanding of each of the issuer's classes of
Common Stock as of the latest practicable date: The total number of shares of
Common Stock, par value $0.01 per share, outstanding as of November 1, 1998 was
5,047,310.
<PAGE>
PACKAGED ICE, INC. AND SUBSIDIARIES
TABLE OF CONTENTS
PAGE
PART I - FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements
Consolidated Balance Sheets as of September 30, 1998
(unaudited) and December 31, 1997............................... 3
Consolidated Statement of Income for the three and nine months
ended September 30, 1998 and 1997 (unaudited)................... 4
Consolidated Statement of Shareholders' Equity as of September
30, 1998 (unaudited)............................................ 5
Consolidated Statement of Cash Flow for the nine months ended
September 30, 1998 and 1997 (unaudited)......................... 6
Notes to the Consolidated Financial Statements.................. 7
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations....................................... 12
PART II - OTHER INFORMATION
Item 1. Legal Proceedings............................................... 17
Item 2. Changes in Securities and Use of Proceeds....................... 17
Item 4. Submission of Matters to Vote of Security Holders............... 18
Item 6. Exhibits and Reports on Form 8-K................................ 18
SIGNATURES.................................................................. 19
2
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
PACKAGED ICE, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1998 1997
------------- -------------
(UNAUDITED)
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents ................................................................ $ 5,655,765 $ 14,825,259
Short-term cash investments .............................................................. -- 4,543,552
Accounts receivable, net ................................................................. 28,165,541 4,103,309
Inventories .............................................................................. 7,925,596 1,347,496
Prepaid expenses ......................................................................... 1,504,014 321,492
------------- -------------
Total current assets ................................................................ 43,250,916 25,141,108
PROPERTY, net .................................................................................. 168,301,464 43,297,449
OTHER ASSETS:
Goodwill and other intangibles, net ...................................................... 224,928,280 44,280,568
Debt issuance costs, net ................................................................. 9,139,090 6,297,712
Other assets ............................................................................. 6,383,832 3,283,617
------------- -------------
TOTAL .......................................................................................... $ 452,003,582 $ 122,300,454
============= =============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Current portion of long-term obligations ................................................. $ 87,568 $ --
Accounts payable ......................................................................... 11,245,228 1,965,093
Payable to affiliates .................................................................... -- 1,309,083
Accrued expenses ......................................................................... 9,783,815 1,461,030
Accrued interest ......................................................................... 4,558,349 1,875,972
Note payable ............................................................................. 107,652 1,975,968
------------- -------------
Total current liabilities ........................................................... 25,782,612 8,587,146
LONG-TERM OBLIGATIONS .......................................................................... 341,780,639 67,501,537
COMMITMENTS AND CONTINGENCIES .................................................................. -- --
MANDATORILY REDEEMABLE PREFERRED STOCK:
10% Exchangeable - 259,860 shares issued and outstanding at September 30,
1998 and 250,000 shares issued and outstanding at
December 31, 1997, liquidation preference of $100 per share ......................... 27,075,343 25,198,630
13% Exchangeable - 411,500 shares issued and outstanding at
September 30, 1998, liquidation preference of $100 per share ........................ 37,383,611 --
PREFERRED STOCK WITH PUT REDEMPTION OPTION:
Series A Convertible - 450,000 shares issued and outstanding at
September 30, 1998 and December 31, 1997 ............................................ 2,496,528 2,496,527
Series B Convertible - 124,831 shares issued and outstanding at
September 30, 1998 and December 31, 1997 ............................................ 726,226 726,226
COMMON STOCK WITH PUT REDEMPTION OPTION:
420,000 shares issued and outstanding at September 30, 1998 and December 31, 1997 ........ 1,971,851 1,971,851
SHAREHOLDERS' EQUITY:
Common stock, $.01 par value, 50,000,000 shares authorized; 4,925,541 shares
Issued at September 30, 1998, and 4,015,981 shares issued at December 31, 1997 ...... 49,255 40,160
Additional paid-in capital ............................................................... 39,337,389 28,804,811
Less: 298,231 shares of treasury stock, at cost ......................................... (1,491,155) (1,491,155)
Accumulated deficit ...................................................................... (23,108,717) (11,535,279)
------------- -------------
Total shareholders' equity .......................................................... 14,786,772 15,818,537
------------- -------------
TOTAL .......................................................................................... $ 452,003,582 $ 122,300,454
============= =============
</TABLE>
See notes to consolidated financial statements.
3
<PAGE>
PACKAGED ICE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------------ -------------------------------
1998 1997 1998 1997
------------ ------------ ------------- ------------
<S> <C> <C> <C> <C>
Revenues .................................................. $ 78,234,417 $ 12,839,427 $ 137,650,144 $ 20,963,363
Cost of sales ............................................. 45,561,354 7,633,353 81,034,845 12,336,269
------------ ------------ ------------- ------------
Gross profit .............................................. 32,673,063 5,206,074 56,615,299 8,627,094
Operating expenses ........................................ 10,250,557 2,383,542 22,013,281 4,565,962
Depreciation and amortization expense ..................... 6,007,870 1,605,014 12,830,246 3,443,480
------------ ------------ ------------- ------------
Income from operations .................................... 16,414,636 1,217,518 21,771,772 617,652
Other income, net ......................................... 353,381 169,569 498,373 577,167
Interest expense (including interest income) .............. (7,730,078) (1,658,055) (16,456,690) (3,176,603)
------------ ------------ ------------- ------------
Income (loss) before income taxes ......................... 9,037,939 (270,968) 5,813,455 (1,981,784)
Income taxes .............................................. -- -- -- --
------------ ------------ ------------- ------------
Net income (loss) before extraordinary item
and preferred dividends .............................. 9,037,939 (270,968) 5,813,455 (1,981,784)
Extraordinary loss on refinancing ......................... -- -- (17,386,893) --
------------ ------------ ------------- ------------
Net income (loss) before preferred dividends .............. 9,037,939 (270,968) (11,573,438) (1,981,784)
Preferred dividends ....................................... 1,941,482 -- 3,949,975 --
------------ ------------ ------------- ------------
Net income (loss) attributable to
common shareholders .................................. $ 7,096,457 $ (270,968) $ (15,523,413) $ (1,981,784)
============ ============ ============= ============
Income (loss) per share of common stock:
Basic:
Income (loss) before extraordinary item
attributable to common shareholders ............ $ 1.41 $ (0.07) $ 0.39 $ (0.57)
Extraordinary item ............................. -- -- (3.60) --
------------ ------------ ------------- ------------
Income (loss) attributable to
common shareholders ............................ $ 1.41 $ (0.07) $ (3.21) $ (0.57)
============ ============ ============= ============
Diluted:
Income (loss) before extraordinary item
attributable to common shareholder ............. $ 0.97 $ (0.07) $ 0.28 $ (0.57)
Extraordinary item ............................. -- -- (2.61) --
------------ ------------ ------------- ------------
Income (loss) attributable to
common shareholders ............................ $ 0.97 $ (0.07) $ (2.33) $ (0.57)
============ ============ ============= ============
Weighted average common shares outstanding:
Basic .......................................... 5,046,462 3,905,390 4,828,254 3,458,605
============ ============ ============= ============
Diluted ........................................ 7,308,961 3,905,390 6,666,272 3,458,605
============ ============ ============= ============
</TABLE>
See notes to consolidated financial statements.
4
<PAGE>
PACKAGED ICE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
(UNAUDITED)
<TABLE>
<CAPTION>
COMMON STOCK
--------------------
NUMBER
OF PAR PAID-IN TREASURY ACCUMULATED
SHARES VALUE CAPITAL STOCK DEFICIT TOTAL
--------- ------- ------------ ----------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1997 ............ 4,015,981 $40,160 $ 28,804,811 $(1,491,155) $(11,535,279) $ 15,818,537
Issuance of common stock ................ 909,560 9,095 10,595,567 -- -- 10,604,662
Dividends accumulated on
10% Exchangeable Preferred Stock .... -- -- (1,876,713) -- -- (1,876,713)
Dividends accumulated on
13% Exchangeable Preferred Stock .... -- -- (2,073,262) -- -- (2,073,262)
Issuance costs on
13% Exchangeable Preferred Stock .... -- -- (802,665) -- -- (802,665)
Warrants issued in connection with 13%
Exchangeable Preferred Stock ....... -- -- 4,878,760 -- -- 4,878,760
Amortization of warrants ................ -- -- (189,109) -- -- (189,109)
Net loss ................................ -- -- -- -- (11,573,438) (11,573,438)
--------- ------- ------------ ----------- ------------ ------------
Balance at September 30, 1998 ........... 4,925,541 $49,255 $ 39,337,389 $(1,491,155) $(23,108,717) $ 14,786,772
========= ======= ============ =========== ============ ============
</TABLE>
See notes to consolidated financial statements.
5
<PAGE>
PACKAGED ICE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOW
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30,
----------------------------------
1998 1997
------------- ------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss .......................................................................... $ (11,573,438) $ (1,981,784)
Adjustments to reconcile net loss to net cash used in
operating activities (excluding working capital from acquisitions):
Depreciation and amoritzation ................................................ 12,830,246 3,443,480
Amortization of debt discount, net ........................................... 113,296 --
Gain from disposal of assets ................................................. -- (59,158)
Extraordinary loss from refinancing .......................................... 17,386,893 --
Change in assets and liabilities:
Accounts receivable, inventory and prepaid expenses ..................... (11,556,986) (3,431,232)
Accounts payable and accrued expenses ................................... (19,887) 2,376,018
------------- ------------
Net cash provided by (used in) operating activities ............................... 7,180,124 347,324
------------- ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Property additions ................................................................ (15,970,055) (6,708,069)
Cost of acquisitions .............................................................. (294,029,426) (25,731,249)
Proceeds from short-term cash investments ......................................... 4,543,552 --
Increase in other assets .......................................................... (2,268,299) (255,554)
Proceeds from disposition of property ............................................. -- 135,874
------------- ------------
Net cash used in investing activities ............................................. (307,724,228) (32,558,998)
------------- ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common and preferred stock .............................. 39,237,474 2,956,807
Issuance of preferred stock ....................................................... -- (23,774)
Repurchase of common and preferred stock .......................................... -- (1,491,155)
Proceeds from debt issuance, net .................................................. 260,044,825 44,954,082
Cost of refinancing ............................................................... (3,937,500) --
Borrowings from lines of credit ................................................... 89,550,000 5,900,000
Repayment of lines of credit ...................................................... (18,050,000) (3,485,000)
Repayment of debt ................................................................. (75,470,189) (12,086,591)
------------- ------------
Net cash provided by financing activities ......................................... 291,374,610 36,724,369
------------- ------------
NET INCREASE (DECREASE) IN CASH AND EQUIVALENTS ......................................... (9,169,494) 4,512,695
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD .......................................... 14,825,259 169,535
------------- ------------
CASH AND CASH EQUIVALENTS, END OF PERIOD ................................................ $ 5,655,765 $ 4,682,230
============= ============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash payments for interest ........................................................ $ 17,392,995 $ 213,810
============= ============
SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING AND
FINANCING ACTIVITIES:
Common stock issued in consideration for business acquisitions .................... $ 10,564,523 $ 11,449,110
============= ============
Fair value of warrants issued in connection with debt ............................. $ -- $ 6,735,335
============= ============
Fair value of warrants issued in connection with 13% Exchangeable
Preferred Stock .............................................................. $ 4,878,760 $ --
============= ============
Accretion of warrants in connection with 13% Exchangeable
Preferred Stock .............................................................. $ (189,109) $ --
============= ============
Demand notes converted to preferred stock ......................................... $ -- $ 750,000
============= ============
Note payable incurred to purchase assets .......................................... $ -- $ 188,862
============= ============
</TABLE>
See notes to consolidated financial statements.
6
<PAGE>
PACKAGED ICE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998
1. GENERAL
The condensed consolidated financial statements included herein are
unaudited, except for the balance sheet as of December 31, 1997 that has been
prepared from the audited financial statements at that date. These financial
statements have been prepared by the Company pursuant to the rules and
regulations of the Securities and Exchange Commission, and as applicable under
such regulations, certain information and footnote disclosures normally included
in financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted. All significant
intercompany balances and transactions have been eliminated upon consolidation,
and all adjustments which, in the opinion of management, are necessary for a
fair presentation of the financial position, results of operations and cash flow
for the periods covered have been made and are of a normal and recurring nature.
At certain interim reporting dates, the Company's inventory includes packaged
ice for sale, which is accounted for at the lower of average cost or market.
Accounting measurements at interim dates inherently involve greater reliance on
estimates than at year-end and are not necessarily indicative of results for the
full year. The financial statements included herein should be read in
conjunction with the consolidated financial statements and the related notes
thereto included in the Company's annual report on Form 10-K for the year ended
December 31, 1997. Certain amounts from the prior year have been reclassified to
conform to the current presentation.
2. ORGANIZATION
Packaged Ice, Inc. (together with its wholly owned subsidiaries, the
"Company") was incorporated in 1990 in Texas. It is the largest manufacturer and
distributor of packaged ice in the United States and currently serves over
70,000 customer locations in 26 states, with Texas, Arizona, California and
Florida being the most significant markets. The Company provides its customers
with packaged ice (i) through traditional delivery methods, whereby ice is
manufactured, packaged and stored at a central facility and transported to the
retail location when needed and (ii) through proprietary in-store bagging
machines that automatically manufacture, package and store ice at the retail
location (the "Ice Factory"). At September 30, 1998, the Company's customers
were located primarily in the southern half of the United States.
3. ACQUISITIONS
During the nine months ended September 30, 1998, the Company acquired
certain traditional ice businesses and certain assets (the "Acquisitions"). The
purchase prices of the Acquisitions totaled approximately $304.6 million of
which $294.0 million was in cash and $10.6 million was in common stock (903,260
shares) valued at $10 to $13 per share.
Included in Acquisitions was the purchase on May 1, 1998 of all of the
outstanding capital stock of Reddy Ice Corporation, a subsidiary of Suiza Foods
Corporation, for $180.8 million in cash. Additionally, on July 31, 1998, the
Company purchased all of the outstanding capital stock of Cassco Ice & Cold
Storage, Inc., a subsidiary of WLR, Inc. for $59.0 million in cash.
The Acquisitions have been accounted for using the purchase method of
accounting, and accordingly, the purchase prices have been preliminarily
allocated to the assets and liabilities acquired based on fair value at the date
of the Acquisitions. The Acquisitions included, at fair value, current assets of
$20.3 million, property plant and equipment of $117.3 million, and current
liabilities of $17.1 million. The excess of aggregate purchase price over the
fair market value of the net assets acquired of approximately $183.4 million was
recognized as goodwill and other intangibles and is being amortized over 40
years. Amortization expense of goodwill and other assets for the three months
ended September 30, 1998 and 1997 was $2.2 million and $0.4 million,
respectively, and for the nine months ended September 30, 1998 and 1997 was $4.5
million and $0.6 million, respectively.
7
<PAGE>
PACKAGED ICE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998 (CONTINUED)
The operating results of the Acquisitions have been included in the
Company's consolidated financial statements from the date of their respective
purchases. The following unaudited pro forma information presents a summary of
consolidated results of operations as if the Acquisitions had occurred on
January 1, 1997:
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------------------ ---------------------------------------
1998 1997 1998 1997
-------------- -------------- --------------- ---------------
<S> <C> <C> <C> <C>
Revenues ...................... $ 82,284,378 $ 62,625,960 $ 176,528,455 $ 123,547,335
Net income (loss) ............. 10,187,025 10,473,703 (17,019,540) 10,073,987
Earnings (loss) per share:
Basic .................... 2.02 2.18 (3.37) 2.31
Diluted .................. 1.39 1.80 (3.37) 1.97
</TABLE>
4. LONG-TERM OBLIGATIONS
On January 28, 1998, the Company completed a private offering of
$145,000,000 aggregate principal amount of its 9 3/4% Series A Senior Notes due
2005 (the "Senior Notes"). The Senior Notes were issued pursuant to the
indenture dated January 28, 1998, as amended, (the "Indenture"). The Senior
Notes are general unsecured obligations of the Company and are senior in right
of payment to all existing and future Subordinated Indebtedness of the Company
and PARI PASSU to all senior indebtedness of the Company. The Senior Notes are
effectively subordinated to the Company's credit facility. The Senior Notes
contain certain covenants that, among other things, limit the ability of the
Company and its restricted subsidiaries to pay any cash dividends or make
distributions with respect to the Company's capital stock, to incur indebtedness
or to create liens. Net proceeds from the sale of the Senior Notes were used for
(i) repurchase of the Company's 12% Series B Senior Notes due 2004 (the "Series
B Notes") and 12% Series C Senior Notes due 2004 (the "Series C Notes"); (ii)
repayment of all outstanding obligations under the old credit facility; (iii)
funding of acquisitions of traditional ice companies; and (iv) working capital
and general corporate purposes.
Simultaneous with the issuance of the Senior Notes and in conjunction with
the purchase and retirement of $75.0 million of Series B Notes and Series C
Notes, the Company recorded an extraordinary charge of $17.4 million for such
debt extinguishment relating to the write-off of the debt discount, associated
redemption premiums and issuance costs.
On April 30, 1998, the Company issued an additional $125.0 million of
Senior Notes (the "Tack-on-Notes") due February 1, 2005. The Tack-on-Notes were
issued pursuant to the Indenture and are identical in terms to the $145.0
million of Senior Notes issued January 28, 1998. In connection with issuing the
Tack-on-Notes, the Company obtained the consent of a majority of the holders of
the original Senior Notes to certain amendments to the Indenture. The Company
paid consent fees aggregating $1,397,600 to the Senior Note Holders. The
principal amendments to the Indenture allowed the issuance of the Tack-on-Notes
and allowed the Company to enter into a new credit facility. The Company's
Senior Notes (including the Tack-on-Notes) are guaranteed, fully, jointly and
severally, and unconditionally, on a senior unsecured basis by each of the
Company's current and future wholly owned subsidiaries (see Note 6). The net
proceeds of the Tack-on-Notes were used to fund a portion of the cash
consideration for the acquisition of Reddy Ice Corporation.
In July 1998, the Company completed an offer to exchange the Senior Notes
and the Tack-on-Notes (together, the "Series 1 Notes") and the 13% Exchangeable
Preferred Stock (as defined) with new debt (the "Series 2 Notes") and new 13%
Exchangeable Preferred Stock (the "Series 2 Preferred Stock") registered under
the Securities Act of 1933. The forms and terms of the Series 2 Notes and Series
2 Preferred Stock, respectively, are identical in all material respects to the
forms and terms of the Series 1 Notes and the 13% Exchangeable Preferred Stock,
respectively, except for certain transfer restrictions and registration rights
relating to the Series 1 Notes and 13% Exchangeable Preferred Stock.
8
<PAGE>
PACKAGED ICE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998 (CONTINUED)
On April 30, 1998, the Company entered into an $80.0 million, five year
senior credit facility with Antares Leveraged Capital Corporation (the "Credit
Facility") consisting of a revolving working capital facility of $15.0 million
(the "Revolving Loan") and a revolving acquisition loan facility of $65.0
million (the "Acquisition Loan"). The Credit Facility replaced the Company's old
credit facility.
The outstanding principal balance under the Credit Facility bears
interest, at the Company's option, at LIBOR plus 2.75% per annum, or the "prime"
rate plus 1.00%, with interest rates subject to a pricing grid. Amounts
outstanding under the Revolving Loan of the Credit Facility are due March 31,
2003. Amounts outstanding under the Acquisition Loan of the Credit Facility will
amortize in 12 equal quarterly installments commencing June 30, 2000. The Credit
Facility contains financial covenants which include limitations on capital
expenditures and the maintenance of minimum ratio levels of earnings before
interest, taxes and depreciation and amortization ("EBITDA") to fixed charges,
interest coverage and leverage, as defined in the agreement, and is secured by
substantially all of the Company's assets and the capital stock of all of the
Company's significant subsidiaries.
At September 30, 1998 and December 31,1997, long-term obligations
consisted of the following:
SEPTEMBER 30, DECEMBER 31,
1998 1997
------------- ------------
Senior notes ...................... $ 270,000,000 $ 75,000,000
Less: Unamortized debt discount on
detachable warrants issued ... -- (7,498,463)
Less: Unamortized debt discount on
senior notes ................. (249,821) --
Bank credit facilities ............ 71,500,000 --
Other ............................. 618,028 --
------------- ------------
Total ............................. 341,868,207 67,501,537
Less: Current maturities ......... (87,568) --
------------- ------------
Long-term obligations, net ........ $ 341,780,639 $ 67,501,537
============= ============
As of September 30, 1998, principal maturities of long-term obligations
for the next five years are as follows:
Through December 31, 1998 ......... $ 21,892
1999 .............................. 87,676
2000 .............................. 16,313,558
2001 .............................. 21,731,225
2002 .............................. 21,745,474
And thereafter .................... 281,968,382
-------------
Total ............................. $ 341,868,207
=============
5. CAPITAL STOCK
PREFERRED STOCK - On April 30, 1998, the Company entered into a Securities
Purchase Agreement (the "Securities Purchase Agreement") with Ares Leveraged
Investment Fund, L.P. ("Ares") and SV Capital Partners, L.P. ("SV") pursuant to
which Ares acquired 325,000 shares and SV acquired 75,000 shares of the
Company's 13% Mandatorily Redeemable Preferred Stock (the "13% Exchangeable
Preferred Stock") at $100 per share for an aggregate amount of $40.0 million.
Holders of the 13% Exchangeable Preferred Stock have no voting rights other than
approval rights with respect to the issuance of parity or senior securities. In
addition, there are various situations in which the Company may either elect or
be required to redeem the 13% Exchangeable Preferred Stock. The Company is
obligated to redeem the 13% Exchangeable Preferred Stock for cash on May 1,
2005.
9
<PAGE>
PACKAGED ICE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998 (CONTINUED)
The 13% Exchangeable Preferred Stock bears a dividend rate of 13% per
annum; however, during the first twelve months following issuance, the dividend
rate will be 11.5%, and during the second twelve months following issuance, the
dividend rate will be 12.25%. Dividends are fully cumulative and payable
quarterly in cash, except that during the first five years after issuance,
dividends may be paid in kind by issuing additional shares of 13% Exchangeable
Preferred Stock. If the Company is unable for any reason to pay dividends in
cash after the fifth anniversary or in the event of a default, the holders of
13% Exchangeable Preferred Stock will have the right to add up to two directors
to the Board of Directors, and the dividend rate will be increased until the
default is cured.
Additionally, Ares and SV entered into Warrant Agreements granting
warrants to purchase an aggregate of 975,752 shares of the Company's common
stock with an exercise price of $.01 per share. The warrants are valid until May
31, 2005 but are exercisable only under certain conditions, such as an initial
public offering of common stock, change of control, merger, asset sale or
default.
The Securities Purchase Agreement contains certain restrictive
administrative covenants and requires a vote of two-thirds of the Board of
Directors before the Company may take certain significant actions. The Company
may exchange the 13% Exchangeable Preferred Stock for subordinated notes at the
Company's option.
On May 1, 1998, the Company elected to pay in kind the dividends due on
its 10% Exchangeable Preferred Stock. Such payment resulted in the issuance of
9,860 shares of 10% Exchangeable Preferred Stock and 75,844 warrants to purchase
the Common Stock, exercisable at $13 per share.
On August 1, 1998, the Company elected to pay in kind the dividends due on
its 13% Exchangeable Preferred Stock. Such payment resulted in the issuance of
11,500 shares of 13% Exchangeable Preferred Stock.
6. SUBSIDIARY GUARANTORS
The Company's Senior Notes are guaranteed, fully, jointly and severally,
and unconditionally, on a senior unsecured basis, by all of the Company's
current and future, direct and indirect, wholly owned subsidiaries (the
"Subsidiary Guarantors"). The following table sets forth the "summarized
financial information" of the Subsidiary Guarantors. Full financial statements
of the Subsidiary Guarantors are not presented because management believes they
are not material to the investors. There are currently no restrictions on the
ability of the subsidiary guarantors to transfer funds to the Company in the
form of cash dividends, loans or advances.
SEPTEMBER 30, DECEMBER 31,
1998 1997
------------ -----------
Balance Sheet Data:
Current assets ......................... $ 43,465,068 $ 6,591,604
Property and equipment ................. 168,301,464 32,622,152
Total assets ........................... 442,493,745 71,381,168
Current liabilities .................... 20,591,759 3,904,149
Long-term debt ......................... 530,903 --
Total shareholders' equity ............. 272,710,874 16,707,700
NINE MONTHS ENDED SEPTEMBER 30,
----------------------------------
1998 1997
------------ -----------
Operating Data:
Net revenues ................... $126,055,125 $12,517,156
Gross profit ................... 50,586,682 6,043,143
Net income ..................... 10,743,298 3,138,620
10
<PAGE>
PACKAGED ICE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998 (CONTINUED)
7. COMMITMENTS AND CONTINGENCIES
During 1998, the Company entered into certain employment contracts with
former employees of acquired companies with an aggregate annual commitment of
approximately $2,051,836.
The Company leases certain of its facilities. Under these and other
operating leases, minimum annual rentals at September 30, 1998 aggregate
approximately $520,338 for the remainder of 1998; $1,861,185 in 1999; $1,692,019
in 2000; $1,607,838 in 2001; $1,578,010 in 2002 and $8,922,331 thereafter. Rent
expense was $1,764,300 and $427,975 for the nine months ended September 30, 1998
and 1997, respectively.
The Company is involved in various claims, lawsuits and proceedings
arising in the ordinary course of business. While there are uncertainties
inherent in the ultimate outcome of such matters and it is impossible to
presently determine the ultimate costs that may be incurred, management believes
the resolution of such uncertainties and the incurrence of such costs should not
have a material adverse effect on the Company's consolidated financial position
or results of operations.
8. NEW ACCOUNTING PRONOUNCEMENTS
On January 1, 1998, the Company adopted Statement of Financial Accounting
Standards ("SFAS") No. 130, Reporting Comprehensive Income. SFAS No. 130 is a
more inclusive financial reporting methodology that includes disclosure of
certain financial information that historically has not been recognized in the
presentation of net income. SFAS No. 130 requires the reporting of comprehensive
income in addition to net income from operations. For the nine months ended
September 30, 1998, the Company had no items of comprehensive income, and as a
result the Company's reported net income was the same as comprehensive income.
In February 1998, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 132, Employer's Disclosures about Pensions and Other Post-retirement
Benefits, which revises certain disclosure requirements of the employer, and is
effective for fiscal years beginning after December 15, 1997. SFAS No. 132 will
have no impact to the Company, as it provides no pension or other
post-retirement benefits to its employees.
11
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion and analysis of the Company's financial condition
and results of operations should be read in conjunction with the Company's
Consolidated Financial Statements and the notes thereto and other information
included elsewhere in this Form 10-Q and the Company's Form 10-K previously
filed.
With the exception of historical information, this Form 10-Q contains
forward-looking statements that involve risks and uncertainties, and actual
results could differ materially from the results discussed. The words and
phrases "should be," "will be," "believe," "expect," "anticipate" and similar
expressions identify forward-looking statements. These forward-looking
statements reflect the Company's current views in respect of future events in
financial performance but are subject to many uncertainties and factors relating
to the Company's operations and business environment that may cause its actual
results to differ materially from any future results expressed or implied by
such forward-looking statements.
OVERVIEW
The Company is the largest manufacturer and distributor of packaged ice in
the United States and currently serves over 70,000 customer locations in 26
states, with Texas, Arizona, California and Florida being the most significant
markets. The Company services all significant markets of the ice industry,
including supermarkets and convenience store retailers, restaurants, commercial
users and the agricultural sector. The Company manufactures its ice in crushed,
cubed, half-moon and cylindrical forms and packages its ice primarily in six to
40 pound bags for eventual sale to retail customers and sells block ice in 10
and 300 pound sizes, primarily to commercial and agricultural users. Seven pound
bags are the most commonly purchased size in the industry. Restaurants and other
commercial users typically purchase packaged ice sold in 20 pound and 40 pound
bags.
The Company operates predominantly in one business segment, the
manufacturing and sale of packaged ice products. These revenues are derived from
the sale of packaged ice through traditional delivery methods, whereby ice is
manufactured, packaged and stored at a central facility and transported to the
retail location when needed, and through its proprietary Ice Factories, which
automatically manufacture, package and store ice at the retail location.
The Company expects that most of its sales will continue to be from the
sale of ice through traditional delivery methods. Although representing a
significantly smaller portion of total sales, the Ice Factory will continue to
have application in high volume retail stores. Prices for packaged ice have
historically been stable with some price variations between markets based on
geography, weather and the customer base. Management believes that the Company's
geographic and customer diversification insulates it from both price and demand
fluctuations due to regional weather conditions. The Company also derives
revenue from other goods and services including cold storage rental, the
manufacturing and sale of bottled water and institutional ice machine leasing.
The Company's cost of sales includes costs associated with both
traditional ice delivery and Ice Factories. In the traditional ice business,
plant occupancy, plastic bags, delivery, labor and utility related expenses
account for the largest costs. Costs vary significantly by region and fluctuate
based upon, among other things, freezer capacity and local utility rates. With
the Ice Factory, plant occupancy, delivery and utility costs are eliminated, but
costs associated with customer service representatives and machine technicians
are added to the cost of sales.
The Company's operating expenses include costs associated with selling,
general and administrative functions. These costs include executive officers'
compensation, office and administrative salaries and costs associated with
leasing office space. Selling, general and administrative functions related to
traditional ice plants and Ice Factories are similar. These operating expenses
are typically higher when the Company enters new markets in which it intends to
place the Ice Factories, as new marketing programs, accounting systems and
office facilities must be established.
12
<PAGE>
The Company has grown primarily through the implementation of its
consolidation strategy within the highly fragmented packaged ice industry, where
it has completed 53 acquisitions since April 1997 for an aggregated purchase
price of $353.7 million and, to a lesser extent, through the installation of Ice
Factories. The Company's acquisition program has resulted in the recordation of
$228.1 million in goodwill and other intangible assets on the Company's books,
which will be amortized over a 40-year period. The Company's acquisition program
has been financed almost exclusively through the incurrence of debt and the
issuance of capital stock. As a result of these financings by which the Series B
and C Notes were refinanced, the Company recorded an extraordinary loss on
refinancing of $17.4 million in the first quarter of 1998.
RESULTS OF OPERATIONS
The following table sets forth for the periods indicated selected
operating data for the Company expressed as a percentage of total revenue:
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
---------------- ----------------
1998 1997 1998 1997
------ ------ ------ ------
<S> <C> <C> <C> <C>
Operating Data:
Revenues ............................ 100.0% 100.0% 100.0% 100.0%
Cost of sales ....................... 58.2 59.5 58.9 58.8
Gross profit ........................ 41.8 40.5 41.1 41.2
Operating expenses (1) .............. 13.1 18.5 16.0 21.8
Depreciation and amortization ....... 7.7 12.6 9.3 16.4
Interest expenses ................... 9.9 12.9 12.0 15.2
Other income ........................ 0.5 1.3 0.4 2.8
Net income (loss) before extraordinary
item and preferred dividends........ 11.6 (2.2) 4.2 (9.4)
</TABLE>
(1) Excludes depreciation and amortization.
THREE MONTHS ENDED SEPTEMBER 30, 1998 COMPARED TO THREE MONTHS ENDED SEPTEMBER
30, 1997
REVENUES: Revenues increased $65.4 million, from $12.8 million for the
three months ended September 30, 1997 to $78.2 million for the three months
ended September 30, 1998. This increase resulted from an increase of $63.4
million due to acquisitions completed in 1997 and 1998 and an increase of $2.0
million due to placement of additional Ice Factories. Additionally, the
unprecedented hot, dry weather during the three months ended September 30, 1998,
throughout the southeastern United States and Texas, resulted in greater sales
than anticipated.
COST OF SALES: Cost of sales increased $37.9 million, from $7.6 million
for the three months ended September 30, 1997 to $45.5 million for the three
months ended September 30, 1998. This increase primarily resulted from
acquisitions of traditional ice companies. As a percentage of revenues, cost of
sales declined from 59.5% for the three months ended September 30, 1997 to 58.2%
for the three months ended September 30, 1998. Since a substantial portion of
cost of sales is of a fixed nature, the greater revenue volume experienced for
the three months ended September 30, 1998 benefited gross profit. This benefit
was partially offset by the additional costs directly related to the cumulative
effect of the unprecedented heat experienced during the 1998 summer period.
Additional costs included the cost of purchasing ice from third parties and
transporting both purchased and Company-produced ice into other regions that
were unable to meet demand with local ice producing capacity.
GROSS PROFIT: Gross profit increased $27.5 million, from $5.2 million for
the three months ended September 30, 1997 to $32.7 million for the three months
ended September 30, 1998. This increase primarily resulted from acquisitions of
traditional ice companies. As a percentage of revenues, gross profit increased
from 40.5% for the three months ended September 30, 1997 to 41.8% for the three
months ended September 30, 1998. The greater revenue volumes experienced for the
three months ended September 30, 1998 and lower cost of sales margins resulted
in increased gross profit during the period.
13
<PAGE>
OPERATING EXPENSES: Operating expenses increased $7.9 million, from $2.4
million for the three months ended September 30, 1997 to $10.3 million for the
three months ended September 30, 1998. This increase primarily resulted from
acquisitions of traditional ice companies. As a percentage of revenues,
operating expenses decreased from 18.5% for the three months ended September 30,
1997 to 13.1% for the three months ended September 30, 1998. This decrease was
due to greater efficiencies realized by the Company as its general and
administrative expenses were spread over the larger base of revenues resulting
primarily from the Company's acquisitions closed in 1997 and 1998.
DEPRECIATION AND AMORTIZATION EXPENSES: Depreciation and amoritzation
increased $4.4 million, from $1.6 million for the three months ended September
30, 1997 to $6.0 million for the three months ended September 30, 1998. As a
percentage of sales, depreciation and amortization decreased from 12.6% for the
three months ended September 30, 1997 to 7.7% for the three months ended
September 30, 1998. This decrease was primarily due to the lower historical
depreciation and amortization percentages of the businesses acquired in 1997 and
1998. These percentages reflect the longer estimated useful lives of traditional
ice plants and equipment, as compared to Ice Factories.
INTEREST EXPENSE: Interest expense increased $6.0 million, from $1.7
million for the three months ended September 30, 1997 to $7.7 million for the
three months ended September 30, 1998. This increase was a result of higher
levels of debt associated with the Company's borrowing of $270.0 million through
the issuance of Senior Notes and borrowings under the Credit Facility, the
proceeds of which were used to consummate 1998 acquisitions and for working
capital.
NET INCOME (LOSS) BEFORE EXTRAORDINARY ITEM AND PREFERRED DIVIDENDS: Net
income (loss) before extraordinary item and preferred dividends increased $9.3
million, from a $0.3 million loss for the three months ended September 30, 1997
to $9.0 million of net income for the three months ended September 30, 1998. The
increase in net income was a result of the significantly higher level of
revenues due to the acquisitions closed in 1997 and 1998 and a higher level of
revenues due to hotter, dryer weather than normally experienced during the third
quarter. The higher revenues produced an improved gross margin (gross profit),
which more than offset the additional cost related to unprecedented heat and the
higher level of expenses caused by acquisitions, including interest expense
associated with the debt required to close such acquisitions.
NINE MONTHS ENDED SEPTEMBER 30, 1998 COMPARED TO NINE MONTHS ENDED SEPTEMBER
30, 1997
REVENUES: Revenues increased $116.7 million, from $20.9 million for the
nine months ended September 30, 1997 to $137.6 million for the nine months ended
September 30, 1998. Revenues increased $112.2 million as a result of revenue
contributed by acquisitions closed during and subsequent to the nine-month
period ended September 30, 1997 and $4.5 million due to placement of additional
Ice Factories since the nine-month period ended September 30, 1997.
Additionally, the unprecedented hot, dry weather during the 1998 summer,
throughout the southeastern portion of the United States and Texas, resulted in
much greater sales than anticipated and more than offset the shortfall of sales
during the first quarter of 1998 as a whole.
COST OF SALES: Cost of sales increased $68.7 million, from $12.3 million
for the nine months ended September 30, 1997 to $81.0 million for the nine
months ended September 30, 1998. This increase primarily resulted from
acquisitions of traditional ice companies completed during 1997 and 1998. The
cost of sales as a percentage of revenues was 58.8% for the nine months ended
September 30, 1997 and 58.9% for the nine months ended September 30, 1998. Since
a substantial portion of cost of sales is of a fixed nature, the greater revenue
volume experienced during the nine months ended September 30, 1998 benefited
gross profit. This benefit was partially offset by the additional costs directly
related to the cumulative effect of the unprecedented heat experienced during
the 1998 summer period. Additional costs included the cost of purchasing ice
from third parties and transporting both purchased and Company-produced ice into
other regions that were unable to meet demand with local ice producing capacity.
GROSS PROFIT: Gross profit increased $48.0 million, from $8.6 million for
the nine months ended September 30, 1997 to $56.6 million for the nine months
ended September 30, 1998. This increase primarily resulted from acquisitions of
traditional ice companies completed during 1997 and 1998. As a percentage of
revenues, gross
14
<PAGE>
profit was 41.2% for the nine months ended September 30, 1997 and 41.1% for the
nine months ended September 30, 1998.
OPERATING EXPENSES: Operating expenses increased $17.4 million, from $4.6
million for the nine months ended September 30, 1997 to $22.0 million for the
nine months ended September 30, 1998. This increase primarily resulted from
acquisitions of traditional ice companies completed during 1997 and 1998. As a
percentage of revenues, operating expenses decreased from 21.8% for the nine
months ended September 30, 1997 to 16.0% for the nine months ended September 30,
1998. This decrease was due to greater efficiencies realized by the Company as
its general and administrative expenses were spread over the larger base of
revenues resulting primarily from the Company's acquisitions completed during
1997 and 1998.
DEPRECIATION AND AMORTIZATION EXPENSES: Depreciation and amortization
increased $9.4 million, from $3.4 million for the nine months ended September
30, 1997 to $12.8 million for the nine months ended September 30, 1998. As a
percentage of sales, depreciation and amortization decreased from 16.4% for nine
months ended September 30, 1997 to 9.3% for the nine months ended September 30,
1998. This decrease was primarily due to lower historical depreciation and
amortization percentages of the businesses acquired in 1997 and 1998. These
percentages reflect the longer estimated useful lives of traditional ice plants
and equipment, as compared to Ice Factories.
INTEREST EXPENSE: Interest expense increased $13.3 million, from $3.2
million for the nine months ended September 30, 1997 to $16.5 million for the
nine months ended September 30, 1998. This increase was a result of higher
levels of the Company's debt associated with the Company's borrowing of $270.0
million through the issuance of Senior Notes and borrowings under the Credit
Facility, the proceeds of which were used to consummate 1998 acquisitions and
for working capital.
NET INCOME (LOSS) BEFORE EXTRAORDINARY ITEM AND PREFERRED DIVIDENDS: Net
income (loss) before extraordinary item and preferred dividends increased $7.8
million, from a $2.0 million loss for the nine months ended September 30, 1997
to $5.8 million of net income for the nine months ended September 30, 1998. The
increase in net income was a result of the significantly higher level of
revenues due to the acquisitions closed in 1997 and 1998 and a higher level of
revenues due to hotter, dryer weather than traditionally experienced during the
second and third quarters of 1998. The higher revenues produced an improved
gross margin (gross profit), which more than offset the additional cost related
to unprecedented heat and the higher level of expenses caused by acquisitions,
including interest expense associated with the debt required to close such
acquisitions.
EXTRAORDINARY LOSS ON REFINANCING: During the first quarter of 1998,
simultaneously with the issuance of the Senior Notes and in conjunction with the
repurchase of $75.0 million of Series B Notes and Series C Notes, the Company
recorded an extraordinary loss on refinancing of $17.4 million for such debt
extinguishment, which related to the write-off of the debt discount, associated
redemption premiums and issuance costs.
LIQUIDITY AND CAPITAL RESOURCES
The Company generates cash from the sale of packaged ice through
traditional delivery methods, whereby ice is manufactured, packaged and stored
at a central facility and transported to retail locations when needed and
through Ice Factories, which manufacture, package and store ice in retail
locations. The Company's primary uses of cash are (i) cost of sales, (ii)
operating expenses, (iii) debt service, (iv) capital expenditures related to
acquiring additional Ice Factories and replacing and modernizing the Company's
other capital equipment and (v) the acquisition of traditional ice companies.
At September 30, 1998, the Company had $341.9 million of debt outstanding
as follows: (i) $270.0 million of Senior Notes; (ii) $71.5 outstanding under the
Company's Credit Facility, which, at the Company's option, bears interest at
LIBOR plus 2.75% or the "prime" rate plus 1.0%, with interest rates subject to a
pricing grid; and (iii) $0.4 million outstanding of other debt. The amounts
under the $15.0 million Revolving Loan of the Credit Facility will be due on
March 31, 2003. The amounts under the $65.0 million Acquisition Loan of the
Credit Facility will be due beginning June 30, 2000 in 12 equal quarterly
installments. The Credit Facility contains financial covenants, which include
limitations on capital expenditures and the maintenance of minimum ratio levels
15
<PAGE>
of EBITDA to fixed charges, interest coverage and leverage, as defined in the
agreement, and is secured by all of the Company's assets and the capital stock
of all the Company's significant subsidiaries.
During the nine months ended September 30, 1998, the Company acquired
certain traditional ice businesses and certain assets (the "Acquisitions") to
compliment its core business. The purchase prices of the Acquisitions totaled
approximately $304.6 million of which $294.0 million was in cash and $10.6
million was in common stock (903,260 shares) valued at $10 to $13 per share.
For the nine months ended September 30, 1998, the Company provided $7.2
million of net cash from operating activities and used $307.7 million of net
cash in investing activities, consisting primarily of $294.0 million spent to
complete the Acquisitions. Net cash of $291.4 million was provided by financing
activities, consisting of $39.2 million from the issuance of Preferred and
Common Stock; $260.0 million net from the issuance of the Senior Notes; and
$89.6 million from borrowings under other credit facilities. These amounts were
offset by debt repayments and financing costs of $97.4 million, resulting in a
decrease in cash and equivalents for the nine months ended September 30, 1998 of
$9.1 million.
For the nine months ended September 30, 1998, the Company reported capital
expenditures of approximately $16.0 million spent to maintain and expand
traditional ice facilities and to install new Ice Factories. For the year 1998,
the Company expects capital expenditures to approximate $19.8 million,
consisting of $13.1 million to maintain and expand traditional ice facilities
and $6.7 million for the installation of new Ice Factories.
The Company intends to pursue a growth-oriented strategy, which is to be
implemented through an aggressive acquisition strategy, internal growth, margin
enhancement and expansion into related businesses. The Company continues to
evaluate business acquisition and expansion opportunities, but it currently has
no contracts or capital commitments relating to any potential acquisitions. The
Company does, however, expect to continue acquiring traditional ice companies
using a combination of cash and Common Stock. There can be no assurance that
acquisitions based upon the Company's criteria can be obtained.
The Company believes that it will have adequate working capital to meet
debt service requirements and to satisfy working capital and general corporate
needs. At September 30, 1998, the Company had working capital of $17.5 million,
including $5.7 million of cash and cash equivalents and had $8.1 available under
the Credit Facility. The Company intends to pursue its plan to raise additional
equity capital through efforts to complete its previously announced initial
public offering filed with the Securities and Exchange Commission or,
alternatively, through the sale of equity in private markets. The Company may
need to raise additional funds through public or private debt or equity
financing to take advantage of opportunities that may become available to the
Company, including acquisitions and more rapid expansion. The availability of
such capital will depend upon prevailing market conditions and other factors
over which the Company has no control, as well as the Company's financial
condition and results of operations. There can be no assurances that sufficient
funds will be available to finance intended acquisitions or capital expenditures
to sustain the Company's recent rate of growth.
YEAR 2000
The Company is exposed to the risk that the year 2000 issue (the "Year
2000 Issue") could cause system failures or miscalculations causing disruptions
of operations, including, among other things, a temporary inability to process
transactions, send invoices, or engage in similar normal business activities.
During 1997, the Company undertook a corporate-wide initiative designed to
assess the impact of the Year 2000 Issue on software and hardware utilized in
the Company's operations, including information technology infrastructure ("IT")
and embedded manufacturing control technology ("Non-IT").
The Company's initiative is to be conducted in three phases: assessment,
implementation and testing. During the assessment phase, the Company completed a
comprehensive inventory of IT and Non-IT systems and equipment. Many of the
Company's IT systems include hardware and packaged software purchased from large
vendors who have represented that these systems are year 2000 compliant.
However, the Company has determined that it will be necessary to modify portions
of its financial and accounting software. The Non-IT systems, which include the
Ice Factory, are not at risk to the Year 2000 Issue.
16
<PAGE>
The Company believes that with modifications to its existing software, the
Year 2000 Issue can be mitigated. The implementation of these remediation
efforts is underway and is expected to be completed by March 31, 1999. However,
if such modifications are not made, or are not completed timely, the Year 2000
Issue could have a material impact on the Company's operations. The Company
plans to complete the testing of the year 2000 modifications by early 1999. The
Company has not established a contingency plan but intends to formulate one to
address unavoidable risks, and it expects to have the contingency plan
formulated by mid-1999.
The Company does not currently rely on the IT systems of other companies;
however, failure of the Company's suppliers or its customers to become year 2000
compliant might have a material impact on the Company's operations. The Company
intends to continue to pursue an acquisition strategy; and as a result, there
can be no assurance that the IT systems being used by an acquired company will
be compliant with the Year 2000 Issue or that any such conversion or failure to
convert an acquired system would not have an adverse effect on the Company.
The Company's efforts with respect to the Year 2000 Issue have been
handled internally by management and other Company employees. Costs of
developing and carrying out this initiative are being funded from the Company's
operations and have not represented a material expense to the Company. The
Company has not completed its assessment but currently believes that the costs
of addressing the Year 2000 Issue will not be significant and will not have a
material adverse impact on the Company's financial condition.
SEASONALITY OF ICE BUSINESS AND WEATHER
The Company experiences seasonal fluctuations in its net sales and
profitability with a disproportionate amount of the Company's net sales and a
majority of its net income typically realized in its second and third calendar
quarters (May through September). The Company believes that over 60% of its
revenues will occur during the second and third calendar quarters when the
weather conditions are generally warmer and demand is greater, while
approximately less than 40% of its revenue will occur during the first and
fourth calendar quarters when the weather is generally cooler. As a result of
these seasonal revenue declines and the lack of proportional corresponding
expense decreases, the Company will most likely experience lower profit margins
and possibly experience losses during the first and fourth calendar quarters. In
addition, because the Company's operating results depend significantly on sales
during its peak season, the Company's quarterly results of operations may
fluctuate significantly as a result of adverse weather during this period (such
as an unusually cool or rainy period). Because inclement weather such as the
type caused by the "El Nino" weather phenomena is believed to be a primary cause
for decreased volume in the ice industry, the Company could be adversely
affected by this and other weather phenomena.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company is from time to time party to legal proceedings that arise in
the ordinary course of business. Management does not believe that the resolution
of any threatened or pending legal proceedings will have a material adverse
affect on the Company's financial position, results of operations or liquidity.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
On July 29, 1998, the Company issued 3,000 shares of Common Stock to an
accredited investor under an option agreement entered into June 25, 1997 at a
price of $10 per share.
17
<PAGE>
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
At the Company's Special Meeting of shareholders held on August 4, 1998 in
Houston, Texas, the Company's shareholders voted on the following matters:
1. Approval of amendments to the Restated Articles of Incorporation to
provide, as amended, (i) that directors and officers of the Company
shall be indemnified by the Company against all expense, liability and
loss reasonably incurred and to the extent allowed by the Texas
Business Corporation Act and (ii) that, pursuant to Article 2.28D of
the Texas Business Corporation Act, any action by the shareholders of
the Company shall be taken by the vote of a simple majority rather than
a two-thirds majority, as otherwise required by the Texas Business
Corporation Act. The amendments were approved with 6,497,090 votes in
favor and no votes against.
2. Approval of an amendment to the 1998 Stock Option Plan (the "1998
Plan") to increase the number of authorized shares of Common Stock
available for issuance under the 1998 Plan from 500,000 to 1,000,000.
The amendment was approved with 6,497,090 votes in favor and no votes
against.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(A) EXHIBITS:
The following is a list of exhibits filed as part of this Form 10-Q. Where
so indicated by footnote, exhibits, which were previously filed, are
incorporated by reference.
EXHIBIT NO. DESCRIPTION
- ----------- -----------
2.1 Stock Purchase Agreement among Packaged Ice, Inc., WLR Foods, Inc.
and Cassco Ice & Cold Storage, Inc., dated July 31, 1998. (Exhibit
2.1) (1)
2.2 Non-competition Agreement between WLR Foods, Inc. and Packaged Ice,
Inc. (Exhibit 2.2) (1)
3.1 Articles of Amendment to the Restated Articles of the Company, filed
with the Texas Secretary of State on August 11, 1998. (Exhibit 3.2)
(2)
10.1 Employment Agreement of James F. Stuart, dated effective August 1,
1998. (Exhibit 10.29) (2)
10.2 Employment Agreement of A. J. Lewis III, dated effective August 1,
1998. (Exhibit 10.30) (2)
10.3 Employment Agreement of Jimmy C. Weaver, dated effective May 1,
1998. (Exhibit 10.31) (2)
10.4 Employment Agreement of James C. Hazlewood dated effective November
1, 1997. (Exhibit 10.32) (2)
10.5 Employment Agreement of Graham Davis, dated effective May 1, 1998.
(Exhibit 10.33) (2)
10.6 Recapitalization Agreement, dated August 4, 1998, between SV Capital
Partners, L.P. and Packaged Ice, Inc. (Exhibit 10.28) (2)
11.1 Packaged Ice, Inc. and Subsidiaries Computation of Earnings Per Share.*
27.1 Financial Information Schedule (included in Commission-filed copy
only).*
* Filed herewith.
(1) Filed as an exhibit to Form 8-K, filed on behalf of the Company with
the Securities and Exchange Commission on August 14, 1998.
(2) Filed as an exhibit to the Company's Amendment No. 1 to Registration
Statement on Form S-1 (File No. 333-60627), filed with the Securities
and Exchange Commission on October 2, 1998.
18
<PAGE>
(B) REPORTS ON FORM 8-K:
The following reports on Form 8-K were filed during the three months ended
September 30, 1998.
1. Report on Form 8-K dated August 14, 1998 reporting that the Company
had acquired on July 31, 1998 all of the outstanding capital stock
of Cassco Ice & Cold Storage, Inc., a subsidiary of WLR Foods, Inc.,
("Cassco"). Included were the financial statements for Cassco filed
in connection with the acquisition.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereto duly authorized.
PACKAGED ICE, INC.
Date: November 13, 1998 By: /S/ JAMES F. STUART
James F. Stuart
Chief Executive Officer
Date: November 13, 1998 By: /S/ JAMES C. HAZLEWOOD
James C. Hazlewood
Chief Financial and Accounting Officer
19
<PAGE>
EXHIBIT INDEX
2.1 Stock Purchase Agreement among Packaged Ice, Inc., WLR Foods, Inc.
and Cassco Ice & Cold Storage, Inc., dated July 31, 1998. (Exhibit
2.1) (1)
2.2 Non-competition Agreement between WLR Foods, Inc. and Packaged Ice,
Inc. (Exhibit 2.2) (1)
3.1 Articles of Amendment to the Restated Articles of the Company, filed
with the Texas Secretary of State on August 11, 1998. (Exhibit 3.2)
(2)
10.1 Employment Agreement of James F. Stuart, dated effective August 1,
1998. (Exhibit 10.29) (2)
10.2 Employment Agreement of A. J. Lewis III, dated effective August 1,
1998. (Exhibit 10.30) (2)
10.3 Employment Agreement of Jimmy C. Weaver, dated effective May 1,
1998. (Exhibit 10.31) (2)
10.4 Employment Agreement of James C. Hazlewood dated effective November
1, 1997. (Exhibit 10.32) (2)
10.5 Employment Agreement of Graham Davis, dated effective May 1, 1998.
(Exhibit 10.33) (2)
10.6 Recapitalization Agreement, dated August 4, 1998, between SV Capital
Partners, L.P. and Packaged Ice, Inc. (Exhibit 10.28) (2)
11.1 Packaged Ice, Inc. and Subsidiaries Computation of Earnings Per Share.*
27.1 Financial Information Schedule (included in Commission-filed copy
only).*
* Filed herewith.
(1) Filed as an exhibit to Form 8-K, filed on behalf of the Company with
the Securities and Exchange Commission on August 14, 1998.
(2) Filed as an exhibit to the Company's Amendment No. 1 to Registration
Statement on Form S-1 (File No. 333-60627), filed with the Securities
and Exchange Commission on October 2, 1998.
20
EXHIBIT 11.1
PACKAGED ICE, INC. AND SUBSIDIARIES
COMPUTATION OF EARNINGS PER SHARE
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER
----------------------------- ----------------------------
1998 1997(1) 1998(1) 1997(1)
----------- ----------- ------------ -----------
<S> <C> <C> <C> <C>
Net income (loss) before extraordinary item and
preferred dividends ................................ $ 9,037,939 $ (270,968) $ 5,813,455 $(1,981,784)
Less: Extraordinary item ..................................... -- -- (17,386,893) --
Less: Dividends on 10% Exchangeable and
13% Exchangeable Preferred Stock .................... (1,941,482) -- (3,949,975) --
----------- ----------- ------------ -----------
Income (loss) attributable to common shareholders ............. $ 7,096,457 $ (270,968) $(15,523,413) $(1,981,784)
=========== =========== ============ ===========
Weighted average common shares outstanding .................... 5,046,462 3,905,390 4,828,254 3,458,605
Incremental shares attributable to outstanding
Stock options and warrants .............................. 2,262,499 998,241 1,838,018 744,165
----------- ----------- ------------ -----------
As adjusted for diluted earnings per share calculation ........ 7,308,961 4,903,631 6,666,272 4,202,770
=========== =========== ============ ===========
Income (loss) per common share:
Basic:
Income (loss) before extraordinary item
attributable to common shareholders ................ $ 1.41 $ (0.07) $ 0.39 $ (0.57)
Extraordinary item ................................. -- -- (3.60) --
----------- ----------- ------------ -----------
Income (loss) attributable to
common shareholders ................................ $ 1.41 $ (0.07) $ (3.21) $ (0.57)
=========== =========== ============ ===========
Diluted:
Income (loss) before extraordinary item
attributable to common shareholder ................. $ 0.97 $ (0.06) $ 0.28 $ (0.47)
Extraordinary item ................................. -- -- (2.61) --
----------- ----------- ------------ -----------
Income (loss) attributable to
common shareholders ................................ $ 0.97 $ (0.06) $ (2.33) $ (0.47)
=========== =========== ============ ===========
</TABLE>
(1) This calculation is presented in accordance with Regulation S-K; although
it is contrary to paragraphs 13 and 27 of the Statement of Financial
Accounting Standards 128 "Earnings Per Share."
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEETS AND CONSOLIDATED STATEMENT OF INCOME FOUND ON PAGES
3 AND 4 OF THE COMPANY'S FORM 10-Q FOR THE YEAR-TO-DATE, AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> SEP-30-1998
<CASH> 5,655,765
<SECURITIES> 0
<RECEIVABLES> 29,137,860
<ALLOWANCES> 972,319
<INVENTORY> 7,925,596
<CURRENT-ASSETS> 43,250,916
<PP&E> 182,279,869
<DEPRECIATION> 13,978,405
<TOTAL-ASSETS> 452,003,582
<CURRENT-LIABILITIES> 25,782,612
<BONDS> 341,780,639
64,458,954
3,222,754
<COMMON> 49,255
<OTHER-SE> 16,709,368
<TOTAL-LIABILITY-AND-EQUITY> 452,003,582
<SALES> 137,650,144
<TOTAL-REVENUES> 137,650,144
<CGS> 81,034,845
<TOTAL-COSTS> 115,878,372
<OTHER-EXPENSES> (498,373)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 16,456,690
<INCOME-PRETAX> 5,813,455
<INCOME-TAX> 0
<INCOME-CONTINUING> 5,813,455
<DISCONTINUED> 0
<EXTRAORDINARY> (17,386,893)
<CHANGES> 0
<NET-INCOME> (11,573,438)
<EPS-PRIMARY> (3.21)
<EPS-DILUTED> (2.33)
</TABLE>
